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Education and human capital

Education shows great resilience to shocks—labor demand for highly skilled workers has remained high in all kinds of economic conditions. Public policy for education and human capital includes increasing the economic and social returns on education, fostering greater educational attainment, encouraging social and economic mobility, and providing vocational education, training, and lifelong learning.

Public education tends to crowd out parents’
time and money, but careful policy design may mitigate this

Many countries around the world are making
substantial and increasing public investments in children by providing
resources for schooling from early years through to adolescence. Recent
research has looked at how parents respond to children’s schooling
opportunities, highlighting that public inputs can alternatively encourage
or crowd out parental inputs. Most evidence finds that parents reduce their
own efforts as schooling improves, dampening the efficiency of government
expenditure. Policymakers may thus want to focus government provision on
schooling inputs that are less easily substituted.

Substance use reduces the academic performance
of university students

A non-trivial portion of traffic fatalities
involve alcohol or illicit drugs. But does substance use—which is linked to
depression, suicide, and criminal activity—also reduce academic performance?
Recent studies suggest that the consumption of alcohol has a negative effect
on the grades of university students. Likewise, there is evidence that
marijuana use reduces the academic performance of university students.
Although students who use illicit substances are more likely to drop out of
high school than those who do not, this may reflect the influence of other,
difficult-to-measure factors at the individual level, such as
personality.

Where STEM immigrants were educated strongly
influences their economic success and possibly their impact on
innovation

Canada, the US, and most Western countries are
looking to STEM (science, technology, engineering, and mathematics)
immigrants to boost innovation and economic growth. Canada in particular has
welcomed many STEM immigrants over the past quarter of a century. In the US,
there is an ongoing debate about whether the H–1B visa program is being used
effectively to attract more STEM immigrants. Interestingly, significant
differences exist between the two countries in earnings and likely the
innovation activity of highly educated immigrants, which highlights the
likely role of immigration policy in determining such outcomes.

Employment and labor force participation (LFP)
rates have increased throughout Europe since the 1990s, with little
interruption from the Great Recession. While many credit labor market
reforms for this progress, ongoing educational expansion might actually be
more important. This implies that the overall employment rate of an economy
can change if the share of the population with tertiary education increases,
even in the absence of any labor market reforms or effects of the business
cycle. Taking this compositional effect into account makes it possible to
disentangle the impact of reforms.

Better information on university quality may
reduce underemployment and overeducation in developing countries

As the number of secondary school graduates
rises, many developing countries expand the supply of public and private
universities or face pressure to do so. However, several factors point to
the need for caution, including weak job markets, low-quality university
programs, and job–education mismatches. More university graduates in this
context could exacerbate unemployment, underemployment, and overeducation of
professionals. Whether governments should regulate the quantity or quality
of university programs, however, depends on the specific combination of
factors in each country.

Postponing school tracking can increase social
mobility without significant adverse effects on educational achievement

The goal of school tracking (assigning students
to different types of school by ability) is to increase educational
efficiency by creating more homogeneous groups of students that are easier
to teach. However, there are concerns that, if begun too early in the
schooling process, tracking may improve educational attainment at the cost
of reduced intergenerational social mobility. Recent empirical evidence
finds no evidence of an efficiency–equality trade-off when tracking is
postponed.

Education benefits individuals, but the societal benefits are
likely even greater

Formal schooling increases earnings and provides other
individual benefits. However, societal benefits of education may exceed individual benefits.
Research finds that higher average education levels in an area are correlated with higher
earnings, even for local residents with minimal education. Science, technology, engineering,
and mathematics (STEM) graduates appear to generate especially strong external effects, due to
their role in stimulating innovation and economic growth. Several strategies to test for
causality find human capital externalities do exist.

Cognitive skills are more relevant in explaining earnings,
socio-emotional skills in determining labor supply and schooling

Common proxies, such as years of education, have been shown to
be ineffective at capturing cross-country differences in skills acquisition, as well as the
role they play in the labor market. A large body of research shows that direct measures of
skills, in particular cognitive and socio-emotional ones, provide more adequate estimations of
individuals’ differences in potential productive capacity than the quantity of education they
receive. Evidence shows that cognitive skills in particular are quite relevant to explain
wages, while socio-emotional skills are more associated with labor force and education
participation decisions.

The role of social interactions in modifying individual behavior is central to many fields of social science. In education, one essential aspect is that “good” peers can potentially improve students’ academic achievement, career choices, or labor market outcomes later in life. Indeed, evidence suggests that good peers are important in raising student attainment, both in compulsory schooling and university. Interventions that change the ability group composition in ways that improve student educational outcomes without exacerbating inequality therefore offer a promising basis for education policies.

Employment has grown steadily and the gender gap
and skill premiums have fallen

New Zealand is a small open economy, with large
international labor flows and skilled immigrants. Since 2000, employment
growth has kept pace with strong migration-related population growth. While
overall employment rates have remained relatively stable, they have
increased substantially for older workers. In contrast, younger workers as
well as the Maori and Pasifika ethnic groups experienced a sharp decline in
employment rates and a rise in unemployment around the time of the global
financial crisis. Wage gains have been modest and there has been a
compression of earnings differentials by gender as well as by skill.